OIL FUTURES: Nymex Crude Declines On Cushing Oil Glut

NEW YORK (Dow Jones)--Crude oil futures dropped Thursday, as the front-month contract comes under increasing pressure from a developing surplus at its delivery point in Cushing, Okla.

Light, sweet crude for June delivery traded $1.224 or 1.5%, lower at $82.44 a barrel on the New York Mercantile Exchange. Brent crude on the ICE futures exchange traded 86 cents, or 1%, lower at $84.84 a barrel.

Oil inventories at Cushing reached 34.1 million barrels in the week ended April 16, less than 1 million barrels shy of a record, the U.S. Energy Information Administration said Wednesday. The extra oil has few outlets, with stockpiles across the Midwest at their highest in at least 20 years and refiners already producing enough fuel to further inflate gasoline and distillate inventories.

The oil market is preparing for an extended surplus at the delivery point for physical barrels tied to the crude futures contract. However, many traders are still expecting supplies to tighten later this year as the economic recovery lifts demand. As a result, oil for delivery in next month, when supplies are expected to be high, is trading at an increasingly steep discount to oil for later delivery. Recently, June crude futures traded at a $2.18 discount to the July contract, the widest gap between the two front months since Dec. 15.

"There's just way too much supply available," said Peter Beutel, president of the trading advisory firm Cameron Hanover. "Refiners have tried to take some of that crude oil and avoid putting it in storage by refining it-- that's one of the reasons we saw a building gasoline and distillate stocks."

The EIA reported Wednesday that gasoline inventories shot up 3.6 million barrels in the week ended April 16, as demand for refined products fell to its lowest level since December. Distillate stockpiles, including heating oil and diesel, rose 2.1 million barrels. Analysts had expected gains of only 300,000 barrels for gasoline and 900,000 barrels for distillates. Oil inventories rose 1.9 million barrels, where analysts had anticipated a decline of 200,000 barrels.

Oil prices have managed to remain above $80 a barrel largely due to strong demand out of China, which has exceeded expectations for economic growth over the last 18 months, even as U.S. oil demand has underperformed.

"The shift in the epicenter for demand continues to shift east of the Suez," wrote analysts with Barclays Capital.